EnergyStephanie Anderson Forest
It looks as if the energy sector will strike out everywhere in 1999. Rock-bottom prices for crude oil and deteriorating rates for natural gas, combined with low chemical prices and weak refinery margins, have sent shudders through the industry. Alan H. Struth, senior economist at Phillips Petroleum Co., says he "can't recall a time when all [parts] of the business were at or near record lows. I don't think anyone thought it would come down to this." Now, the pressure is mounting to find more costs to cut and improve profitability.
The pressure was already on in 1998, when inflation-adjusted prices for crude fell to their lowest levels in 12 years. The prospects for 1999 are not much better. The economic woes in Asia and Russia, a worldwide oil glut, slumping demand, and the prospect of yet another warm winter in Europe and America will continue to rock the industry. "It's going to be ugly," predicts Jack Taylor, national industry director for KPMG Peat Marwick's energy practice.
But while supplies will remain at lofty levels in 1999, industrywide production cuts should ease inventory growth somewhat. OPEC is expected to make the biggest cut, though no one is sure how much, during the first half of the year. As a result, 1999 supplies will grow only 0.1%, vs. 1.1% last year, figures CIBC Oppenheimer analyst L. Bruce Lanni. Meanwhile, world demand is expected to rise 1.9%, compared with 1998's 0.7%.
BALMY WEATHER. Still, industry experts say those gains won't be enough to give oil prices a bounce until late 1999--at the earliest. Energy consultant Purvin & Gertz Inc. sees the average cost of a barrel of oil in 1999 at between $14 and $14.50. In 1998, the average price settled at $14.40, after sinking to $10.50 in late December.
Energy companies won't be able to use natural gas to cushion the blow. Until recently, natural-gas prices had been holding up relatively well. But in the past few months, prices have been in free fall, thanks to balmy weather throughout the U.S. This year, natural-gas prices are expected to decline to about $2.25 per 1,000 cubic feet, down from $2.55 in 1998, according to Arthur Andersen & Co.
Wall Street analysts expect service companies and drillers to be the hardest hit. According to Wall Street estimates compiled by First Call Corp., 1999 earnings will fall some 24% at drilling companies, vs. a 13% jump last year, and 8% at equipment companies, compared with a 12% rise in 1998.
In that sort of business climate, look for ever more restructurings, cost-cutting, and mergers, such as the recent $75.3 billion Exxon-Mobil match. "Most companies have accepted the new reality of low prices, low margins, and less access to capital," says Victor A. Burk, managing director of Andersen's worldwide energy services group. Good thing--there aren't a lot of options for the energy business.